He Earned Too Much for Social Security Before His Layoff. This Little-Known Rule Could Still Unlock $16,800.

He Earned Too Much for Social Security Before His Layoff. This Little-Known Rule Could Still Unlock $16,800.

Gerelyn Terzo

Sun, August 2, 2026 at 2:03 PM GMT+3 5 min read

• SWK +3.75%

Quick Read

• Social Security's special first-year rule lets laid-off workers collect full monthly benefits after their layoff, even if earlier wages exceeded the $24,480 annual limit.

• Severance pay may not count toward the earnings limit if the work earning it was completed before retirement, but workers must report it to SSA with documentation.

• Filing Social Security at 62 instead of the full retirement age of 67 permanently cuts the monthly benefit by roughly 30%, making timing critical.

• Are you ahead, or behind on retirement? SmartAsset's free tool can match you with a financial advisor in minutes to help you answer that today. Each advisor has been carefully vetted, and must act in your best interests. Don't waste another minute; learn more here.

A machinist in his early 60s who spent decades at the New Britain plant gets word of the closure, walks out with severance, and starts calculating Social Security. He earned a full salary through the first part of the year, so he assumes the annual earnings limit has already disqualified him from benefits until January. For many workers in his position, that assumption is wrong, and it can cost them thousands of dollars they could have collected.

Stanley Black & Decker (NYSE: SWK) closed its last manufacturing facility in New Britain, Connecticut, on May 18, eliminating about 300 jobs. The plant made single-sided tape measures, a product the company says is becoming obsolete as demand declines. Stanley said it is supporting affected employees with possible jobs at other facilities, severance, and placement services for salaried and hourly workers.

For workers close to retirement age, a midyear job loss opens a Social Security door most people have never heard of. It applies to anyone in the country who leaves work partway through a calendar year, not just those in Connecticut.

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The First-Year Rule That Changes Everything

Social Security has an annual earnings test for people who receive benefits before full retirement age (FRA). If earnings exceed the yearly limit, benefits can be withheld. A laid-off worker who collected a full salary through May could already be well over the $24,480 annual limit for 2026 and assume no benefits are available until January.

Social Security carves out an exception that can apply for one year, usually the first year someone receives benefits. Under the special rule, SSA can pay a full benefit for any whole month it considers the person retired, regardless of how much was earned earlier that year.

For someone under FRA throughout 2026, that means earning $2,040 or less during the month and not performing substantial services in self-employment. The rule looks at each qualifying month on its own. The salary earned before retirement stays in the rearview mirror.

A worker who earned $70,000 before the May 18 plant closing could still collect benefits for June through December if he stays beneath the monthly limit. On a $2,400 benefit, those seven months of checks he thought he had forfeited come to $16,800.

Severance May Not Be the Problem He Thinks It Is

The second piece that trips people up is severance. A payout arrives from the former employer, and the worker assumes the lump sum will push him over the limit and wipe out his benefits.

Under SSA Publication 05-10063, Special Payments After Retirement, severance, accrued vacation or sick pay, bonuses, and similar compensation can qualify as special payments if the work required to earn them was completed before retirement. If SSA agrees that the payment qualifies, it will not count the money toward the earnings limit.

That treatment is not automatic. The worker should tell SSA about the payment and keep the severance agreement, pay stub, and any employer statement showing what the money covers. The check may land in August, but the service that earned it was already behind him.

How the Rest of the Picture Fits

A midyear claim is not automatically the right move. Filing at 62 instead of a FRA of 67 reduces the monthly benefit by roughly 30%. Waiting beyond 67 adds about 8% per year until age 70.

The 2026 Social Security cost-of-living adjustment (COLA) is 2.8%. COLAs are incorporated into the benefit calculation even when someone has not claimed, but an early-filing reduction still leaves him with a smaller monthly check and smaller dollar increases in future years.

Severance, unemployment eligibility, health insurance until Medicare begins at 65, and any 401(k) balance all belong in the claiming decision. For some laid-off workers in their early 60s, Social Security can bridge the months with little or no work, and the special monthly rule keeps that option on the table.

What to Sort Out Before You File

Three checks can prevent an expensive assumption:

• Confirm with the Social Security Administration (SSA) that the special monthly rule applies, then map out which full months after the layoff will remain at or below the $2,040 limit.

• Report the severance and ask whether it qualifies as a special payment under Publication 05-10063. Keep documents showing that it was earned before retirement.

• Compare the immediate checks with the lifetime cost of claiming early. A claim can generally be withdrawn within 12 months, but the benefits received must be repaid. After that window, the early reduction is difficult to unwind.

The hardest mistake is assuming the annual salary settled the question and never checking. A worker can finish May well above the yearly earnings limit and still qualify for seven months of benefits before January arrives. That is worth running directly past SSA before leaving $16,800 on the table.

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